Key Private Equity Criteria for Prosperous M&A

I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. In this episode, Greg Delafranco and I discuss value propositions, due diligence and deal breakers. As a Senior Manager of Corporate Development at Deloitte, with prior experience experience at KPMG and Accenture, Greg shares an in depth understanding of the M and A process. Greg outlines due diligence and integration strategies before sharing lessons learned and insight regarding the future of M and A.

Here's more from Greg first of all, thanks for inviting me and the opportunity to speak. My name is Greg Delafranco. I am currently a Senior Manager of Corporate Development at Deloitte Consulting. Prior to joining Deloitte, I was a Director of Corporate Development at kpmg and prior to joining KPMG I was with Accenture for 16 years in various corporate development, corporate strategy, new venture creation and alliances roles. So within Deloitte Consulting, our mandate is not only from an inorganic perspective, but also from a growth strategy perspective, working with our practice leaders to help them think about growth across a spectrum of different opportunities or options being be that organic, be it partnering or via acquisitions.

Greg, I know last time we spoke we talked a little bit about the difference between perspectives from a corp dev and private equity. And maybe if we can talk a little bit more about that and your experience in terms of the different lenses that they have.

Sure. And one of the things I have is a hypothesis about our PE colleagues versus a strategic buyer. We might look at things from a little bit longer of an ROI cycle. We might be more willing to take a longer payback than a PE or a pure financial buyer because of the strategic importance that we put on either an investment space or a particular target. And so when we look at the beginnings of an inorganic process, when we're looking at what options there are in the marketplace, meaning properties, we begin to develop hypotheses for through three lenses. Strategic Lens We've established our priorities for the year. The firm has established its short term and long term priorities. And how would any of these properties align with those strategic priorities and what we're seeking in an acquisition candidate? We look at them through a cultural lens. How well would the cultures of the respective firms align, what's important to preserve about the target from things that we know, what would be important to preserve and what has to evolve or potentially change. Obviously we look at things from a financial Perspective looking at the business case and understanding the metrics that are associated with that and see how that aligns with our guidelines. Also, when we're in the early stages of looking at the market, call it the doing our market landscape, we look at things like transaction feasibility. So for firms like kpmg, Deloitte, the Big four, there's a uniqueness to doing a deal with one of us. And so we look at things from a transaction feasibility, what do we really think is the likelihood of us doing a transaction in the space? And if we can take that analysis down to a target, if they are a public company, there's some uniqueness to that sort of transaction that we would have to navigate. If they have 100 countries, since we are a member firm organization, that's another thing that we need to just navigate through. So we tend to look at things like if we're able to actually transact in this space.

Now, how about in terms of the perspective from the target company or the company that's selling, what would be their value proposition in terms of going with a strategic or a typical financial.

Sure. So in my experience, and I'll highlight something at KPMG, KPMG's management consulting business was growing, growing very rapidly. And so when we were looking for specific acquisition candidate, we weren't necessarily looking for scale. We were looking for call it practice in a box or leadership in a box. And so if we were able to find a potential acquisition candidate and we tended to deal in the mid market, so sub $75 million in terms of revenue for the target, if we happen to find that target, who themselves were looking to grow. But the CEO felt like he or she was going to have to begin to dig into his or her own investments to grow the business. The value proposition that we would give to them is you would be the foundation for growth within kpmg. Come to kpmg, we have a recognized brand, we have capital and we will build a team around you to help you achieve your vision. Because where you are at and where you want to go is where our clients are already asking us to be. And together with your either subject matter expertise, your technical knowledge and your leadership combined, we can go attack this market. So the value proposition is we are a good home for your people, we have a well recognized brand and we have capital. Now from a Deloitte perspective, those value propositions still hold true, but we just have at Deloitte, obviously the consulting business is larger than kpmg. We're not only just looking for scale, we're looking to fill needs that we don't currently have today. So the message to these targets is not come be one of many, come be another cog in our huge engine. It's come help build $100 million business. A 500 million doll around you.

Very good. And now what about the principal that's just strictly looking to exit? How would you look at that particular deal if it was a principal or owner that's just purely looking to exit and move on to something else?

From an initial valuation perspective, that would give us a little bit of pause. We would want to understand why he or she is looking to exit. But then drilling down into the next layer of management team. Does the CEO or principal have a strong leadership team and are they capable of the sales and delivery responsibilities of this business? If the CEO was the rainmaker and drove the majority of the revenues and he or she was looking to exit, that would raise a red flag for us and we would have to pause to see what we would want to do with that property. Perhaps there's an opportunity to engage the CEO to assist in some sort of transition period and then they can go off and do other things. It would be important for us to have consistency to at least manage during that transitional period.

Great. What are some of the key things that your team does to prepare for a due diligence process?

So the first thing that we do from a diligence process is we begin to collect the hypotheses that we had formed during either the I.O.I. or LOI stage. And we put these on paper and we call them our key due diligence considerations. We align them along the lenses of strategic, cultural and financial. And quite frankly, these become our anchor for the due diligence. They help guide the key activities. The key questions that we're going to ask, the things that we're going to focus on, and we also use these as a reporting mechanism. Each week when we prepare our status report, we take a look at what our key considerations for diligence are and if we learned anything to prove or disprove that hypothesis. We keep the diligence teams, as I said, focused on the top priorities. The key questions, yes, we have project plans, but we keep the stakeholders in the team focused on these key objectives and expected outcomes. So we evolved our diligence process from this Microsoft project based sort of task. You do this, you do this, you do this. But what we evolved that to were here are key questions that we have about the business, the target, and we time phase them. Here's what we want to understand. First, here's what we want to understand. Second, we want to identify the key areas of risk, the key value drivers, identify how we intend to realize synergies and how we successfully will integrate the two organizations.

What are some of the top issues that frequently arise?

I would say it's the speed at which the target can move. There are two sides to that. One, if it's a banker led process or if it's one that you've engaged in exclusive discussions with the target. But we first have to acknowledge and appreciate that due diligence is going to be a disruption to their business, that the target will underestimate this disruption, that they will over promise on what they can deliver and under promise on the speed to which they can deliver the data. The data will be incomplete. But at the same time, we tend to have a lack of access to the target's key resources, be it the leadership team or talent. Those two points are particularly true if you're dealing with an exclusive relationship. Deloitte recently acquired Casey Quirk, a strategy firm in the financial services space. There were only three people that knew about the transaction. The managing partner, the CEO and the controller. And when we sent off our due diligence list, the controller was responsible for finding all the information, which meant that she also needed to get it without trying to tip people off that a transaction was being contemplated. And so when the target gets the initial due diligence list, there's a gasp. They can't believe the amount of data that we're asking for. And then they begin to huddle, understand where they can get the information from. They think they can get it quickly. It turns out that they can't get it quickly because it's not in a centralized place that they've got to go to 15 different people to go get it. And then when it comes to us, it's incomplete. But yet we can't ask the person who provided the data because they don't know about the transaction. So when you're going through due diligence, you're beginning to identify those things that when an opportunity arises that you need access to people from either from a sales perspective, a delivery perspective, a technology perspective to understand more more about how the business is run.

Now, what's the reason to keep it under wraps from Deloitte's side?

I'm sorry, it's not us, it's the target that keeps it under wraps.

Gotcha. So they don't want anybody to know.

Also, if the banker led process, more people in the organization know about it, but not everybody knows about it. So the CEO, he or she has decided it's time to sell the company. He might inform, he or she might inform the leadership team. They engage a banker. You have access to like the top leadership team, but you might not have access to the guy who leads a delivery center or a technology center or something like that. And they say you'll get access to that person as we get further down the process. But if it's not banker led and you're dealing directly with the CEO, they're going to get completely overwhelmed. And so one of the things that we do, if I could evolve the conversation a bit, One of the things that we do from managing the process perspective is communicate, communicate, communicate. And that is not only internally but also with the client from a diligence perspective. From an internal perspective, we have, you know, three times a week, cadence calls with the work streams. When I was with kpmg, we acquired the HR service delivery practice from Towers Watson. We came up with the idea of a daily blog. So at the end of each day we highlighted key findings, key activities for the next day, and the timeline for the next week. And so here's what we learned. Here are the implications of what we learned. Here's what we're focused on tomorrow and here's what we're focused on next week. And so that became an effective tool. The distribution list of that blog grew because somebody got it, found it useful, pass it along somebody else. And then I would get a new subscriber and somebody would say, hey, can I get on your blog? Eventually made its way up to leaders who, you know, wanted that daily sort of update. We also would have daily updates with the target to go over the due diligence list, go over requests that are outstanding, go over new requests, go over data that we received that we feel is incomplete. We would set up a calendar with the target and it said, Monday, Wednesday, Friday, we will go over due diligence items. Tuesday will be HR people related items and Thursday will be financial related items. We did this especially with the Towers Watson deal, had a daily call, but each day had its own topic. So we could be laser focused on the sort of items that we wanted to talk about.

That's really interesting when you mentioned the daily blog, because most of the corp dev teams I've spoken with, they typically depend on weekly meetings. So a lot of times their findings end up in scratch pads or notes and they don't get presented until a weekly meeting comes up. And I think You've probably experienced that before, I guess. Were there some other differences that made where now you're bringing into more of a digital medium, aside from being able to share these items more on a daily basis, I guess. Were there other benefits that you saw from doing that?

It brought the teams closer because many of the teams, while we had war rooms set up, when you're working with folks from functional areas hr, it, they're not necessarily in the room. And so what we were trying to do was there was so much information flowing between the work streams. We wanted to try to find a way to make the teams connected. One of the things that we view as being the due diligence, pmo, for lack of a better word, is things come into us and it's our job also to get things out to people. You know, it's that push, pull or however they call it. And so I wanted to make sure that whether or not my HR team is really interested in things that we found out from a tax perspective, I don't know, but it's really not. I shouldn't be making a judgment call as to what they view as important. From working with them, from working with each of the work streams, I gained an understanding about what they find interesting or value. But what I was trying to do was create a situation where each of the work streams had visibility into all of the data or all the findings. So trying to create kind of just not siloed work streams, but a coordinated sort of approach across the work streams.

That seems to be a big challenge. Were there any benefits? Did you see more findings coming about or just people feeling more comfortable communicating those findings with each other?

Yes, I would say it was more the latter. And what we did is we held, although it made at times for large calls, the calls that we had with work streams weren't work stream focused, they were all work streams. And we would obviously have 10 minutes for HR, 10 minutes for it, 10 minutes for finance, 10 minutes for legal. But it was all designed with ensuring that each work stream got the benefit of hearing about another work stream. Particularly when in the environment that I'm in, the big four, a regulated industry. So it's important for things like risk management and legal to be connected, for tax and legal to be connected. And so it's not uncommon. It's nothing, you know, earth shattering that we do, having cross functional team calls. But when you have that call and that team says that's important to me, I like to hear more about that. You can least serve that connection point and say why don't you guys take that offline?

Gotcha. What are some deal breakers that you seen during due diligence?

I was on one deal, and through our process, we discovered that the company did not have any pipeline. And we were like, what happened here? Where's your pipeline? Oh, we don't have any pipeline. So that means that you're not currently selling. Yeah, we're not really selling. I'm like, okay, you know, so there was two points there. One, was there something in our vetting process that broke down that our business sponsor should have been aware of through his interactions with the company. But as we began to dig into follow our process, follow our cadence, follow our methodology, we quickly realized that we had there were potential issues with the solvency of the company. And so that was one that we then pivoted from doing an acquisition to something more like a business relationship, like an alliance. We could serve as a channel for this organization and maybe get a license for the technology instead of having to acquire the company. Other deal breakers include, I mean, there's the obvious ones. From a legal perspective, if you find out something that from a legal perspective that is just, you know, wrong or not permitted in the world that I live in, things that become deal breakers are around risk management and independence, auditor independence. So if it turns out that the client base we audit 50% of their clients, it means that those are clients that we, from a consulting perspective, will not be able to serve for the foreseeable future. Which means that the business case takes a 50% haircut on day one, which means we need to try to cover, you know, recover that ongoing, which makes the financials, the roi, the payback challenged. Another area would be risk management. From our perspective. If we were getting into a completely new business that has a new way of contracting because we are part of a regulated industry, things like that prove to be challenging. Of course, there is the cultural aspects as well, that through due diligence, you find that there is just not a majority match from either a personality perspective with the leader or the CEO or the principal. You just realize that he or she and the culture of that organization is just not going to mesh with the culture of yours.

Interesting. Looking at the culture perspective, I'm curious to know, what's your approach for handling the integration process?

Yes, so from an integration process perspective, we look at things from a couple of different perspectives. Early on in the due diligence process, we're seeking that integration team. We're looking at the type of person that we think is best suited for this transaction, we're looking at the leadership team internally, our own leadership team, and saying, do we have the right leaders in place to grow this business? We begin to identify the sources of value in the business case. So purely from an integration methodology, we've begun to evolve from a functional integration, if you will. We're going to integrate hr, we're going to integrate it, we're going to integrate, you know, the other function to more of a sources of value integration approach. The business case head was driven off of these four things and we put a focus on those. If one was to look at like a slide in our integration approach deck, you would see three or four pillars that would highlight the sources of value. And then underneath that you would have the functional areas, hr, it, legal. And we would organize our teams around the sources of value so that we can, you know, obviously focus ourselves on the things that are going to have the greatest impact on the business case. As we get closer to closed. So I'm making a distinction now between sign and close. We begin to bring the target into the integration process. We like to say we do integration with you, not to you. So when one looks at our org chart, there would be a Deloitte or KPMG person paired with a person from the target. And our job is to try to identify areas where one of those, one of the people from the target can actually have a leadership role, either the overall program or an individual activity. So what we're trying to do is bring the two teams together early on, try to build a culture of togetherness and begin to put them on the point to deliver some of the items that we've identified.

One question comes to mind is how do you keep from double counting synergies?

That is a challenge. It's a challenge because of systems that organizations have in place and because you get multiple people can get sales credits in the partner model. So for example, at kpmg, from a business case perspective, we didn't necessarily look at cost synergies. We didn't actually seek out savings that might be realized from a professional services perspective, an accounting perspective, a legal perspective, all those things that KPMG provides as an entity and the company might already have, the focus was on, you know, how can we grow the business. And so the way I read into your question is, you know, what is the performance measurement sort of approach? Once you have, you've closed a transaction that in itself is a whole other world and presents its own sort of challenges, admittedly mostly because of the complexity of the organization and how sales can get tagged in organizations respective systems. Now, one thing I would like to highlight is one of the things that we're evolving from an ongoing measurement perspective is instead of having your traditional scorecard, you know, red, yellow and green lights, that we've hit revenue or we've hit the utilization targets, or the pipeline is as strong as we said it was going to be, we're also putting in what we're calling a strategy triggers assessment. And so through the due diligence and the integration, you're beginning to identify factors, whether it be competitive, client related, technology, regulatory, beginning to identify those triggers that would take, would make you to take pause and reevaluate your strategic plan. And if any one of these triggers were to happen in the market, then that would cause for the deal to go up for review. And the business team, the leadership team, would talk about what pivots we might need to make in the business.

Interesting. So you're monitoring it a lot more closely and creating some certain metrics to go by.

Yeah.

For integrations, what would you point at are the most challenging aspects of it from our perspective?

If you are integrating across countries, if you have an international integration, because in our world, each country is its own member firm, they have a unique culture, sometimes they have their own systems, their own way of doing things. And when you're speaking with a target and you're speaking with the CEO, that person, you know, it might be in the US and you're making broad statements about what the vision is for the combined business and what that CEO hears is everyone's going to be treated the same. Whatever we're talking about here is going to apply in China, in the uk, in France. And so working with those countries early, bringing them into the fold, treating them as if they were a work stream unto themselves in due diligence is one thing that we've spent a considerable amount of time focusing on ensuring that what you actually bought and the quality of the people that you met during management meetings and during due diligence and when you were in the integration kickoff call, that that is on day 30, that that is still the person that you saw three months ago, that for some reason something hasn't changed or that the business has completely fallen off the map.

Now doing cross border integration, do you find your process of integration being replicated by each country you're working with?

Yes, we do. We find that our process, not to sound extreme, but you can take whatever process you're running and it becomes exponentially greater by the number of countries that you have. So like when we were doing the Towers Watson deal at kpmg, we here in the US served as a centralized part of the process. We were home based, so to speak. Each country and we had eight member firms and each country had their own requests. They had the way that they like to see things. They wanted their own access to the in country people. They might have their own way of looking at things from a financial perspective. So what we tried to do was draw consistency across the process. So say globally. Globally, we're going to do this. We'll give you the data that we collected that is specific to your country but. And we'll coordinate questions. But we're looking to you to drive this on an execution perspective, you know, kind of like on the ground perspective.

Okay, so a lot of the control came back to each respective region.

Yes. Because they owned the people, so to speak. So we wanted to make sure that they had an appreciation for the broad principles. What we were doing from a integration perspective, a deal perspective, that our leaders were speaking with the local country leaders to ensure that there was consistency in vision from a business perspective, that there was consistency in a strategy perspective and that these countries were aligned with that vision so that the people on the ground, because they themselves were a close knit group, that we didn't want a practitioner in the UK talking to a practitioner in the US and saying two different things or hearing two different things.

That makes sense. Greg, do you have examples of integrations gone wrong?

Examples that I would show or that I would highlight would be small things like challenges that I've heard about include things like the person just. Or people or the CEO just thought that they were ready to be part of a larger organization and as it turns out they didn't want to be part of a larger organization, that they wanted to go back to being part of a smaller organization. You hear that also ends up trickling down to the staff level, which is the most important component. You run the risk of losing people, which then leads to the potential of impacting the business case. But we, you know, in the organizations that I've been a part of, we tend to, you know, spend a lot of time up front making sure that the resources that the staff feel that they have a good home for their people and that we offer a good career path for them. But it's sometimes what ends up happening is the integration issues are not so much because of what you have done or haven't done, but it's things like, and I'll make it up the technology that you thought that they had and that you're interested in. Turns out, doesn't really resonate with clients. Or you thought you had a hypothesis how you could take this business and align it with an existing business to have a combined value proposition for clients. And the value proposition with the clients didn't resonate.

Gotcha. You know, to back up a little bit, in the scenario where the CEO doesn't want to be part of a large organization or changes his mind, what do you do in that situation?

That's a difficult conversation to have with that person. Because quite frankly, our deal constructs include a retention program and that we ask the CEO to be a part of the organization for a period of time, three years possibly. And so if that person decides relatively quickly into his or her tenure at the firm that this is not a place that they want to be in, then that is going to be a difficult conversation because that means that he or she is. That they have bonuses, a part of the purchase price that is deferred over a period of, you know, a couple of years that they're either going to walk away from or, you know, it's just. It's going to be a very challenging conversation between the CEO and the organization.

What would you say is the biggest challenge that you personally face today?

I would say at Deloitte. Deloitte is a large organization with many, many businesses and thinking about how to take full advantage of the power of the Deloitte network to execute upon the business case. My experience here at Deloitte, it's not unlike my experience at KPMG and Accenture from a process perspective. And so the challenges that you find are sometimes things that you cannot control. You cannot find the right property. You identify your priority area, you identify the attributes or the qualities of an acquisition target. You begin to scan the market and you can't find an acquisition candidate that suits your needs. I wouldn't necessarily call it a challenge, but it's something that we continue to manage internally is the build versus buy analysis. Executives tend to jump towards acquisition. I need to buy somebody. Why do you need to buy somebody? Because I can't hire quick enough. Have you considered other alternatives? Yes, but I still want to buy somebody. And that's not necessarily, you know, a problem with the organization that needs to be adjusted. It's just working with stakeholders and helping them to think through that. You have options that you don't have to just jump to acquisition and then walking them through that analysis. So you can at least understand on a spectrum of options what Yours are.

Making sure that strategy is really aligned.

Yeah, yeah. You know, it's just around the. Let's not jump into I need $50 million to buy somebody. And then I wouldn't also say it's a challenge, but it's an opportunity when you're working with a business sponsor for them. And I'll pull in an experience from kpmg, we used to call it. What are your acquisition requirements? Our codename for it is what is your purchase order? Just don't tell me that you want to buy Google. Tell me why you want to buy Google, what it is about Google that you like. And let's capture that. And let's capture that from a must have and a nice to have perspective and then use that to inform the landscape. You know, use that as the Google search. I want financial services consulting. Okay, good start. Is there anything within financial services that you want? Oh yes, I want banking. Okay. Within banking, is there anything that you want? Oh yeah, core systems. Oh, okay. So then you can go into Google or your Cap IQ database or hire, you know, an external I banker just to then say I want core banking. You know, see what you can find. Firms that do core banking within financial services. So I wouldn't say that that's a challenge. It's just, it's in somebody's head and it's a matter of extracting that out.

So, Greg, if you were to look back at your career, you have an extensive M and A career, and you were to point out just a few of the most important lessons you've learned that you could share with the aspiring M and A professional, what would those be?

Wow, that's a tough and broad question. But I'm a big proponent of communication, a big proponent of making sure people understand their part of the world, but also the other parts of the world. That also goes for any team members of mine. While they might be kind of focused on an area called the financial model, I want to get them exposure to other parts of the transaction or the deal process so that they have an appreciation. So when it comes time for them to move to evolve out of the financial modeling role, that they have at least a starting point to understand the other parts of our transaction being collaborative. Perhaps that's maybe more of a style thing. In, in roles like ours, one possesses the strategic capabilities, the ability to think strategically about either a space or when you're in a process, a due diligence process. Be able to think strategically but then act tactically. You have to put together the project plan, you need to track your due diligence requests, you need to track your risks. You have to strike a balance between that. I struggle with that sometimes with just the day to day tactical things that need to get done. But at the same time I'm a business advisor to my stakeholders and I need to be in a position to think strategically. I need to think one to two steps ahead of them. Today we are doing this, but on Friday you need to do this or you need to be thinking about this. The implications of what we just found out, out or just learned, just discovered has implications down the road and here's what we need to be thinking about.

Communication, collaboration and figuring out the next steps.

Yeah, I have your crystal ball with you.

So it's the last thing I wanted to ask you is looking forward into the next maybe five years for ma, what would you like to see different?

I think there are opportunities to bring teams even closer together through tools, through technology, collaboration tools, things like that. Culturally people still gravitate towards emails and I think there's an opportunity from like a deal dashboarding perspective, from a collaboration perspective, getting teams to from a due diligence process, mainly getting teams to to collaborate on the same documents. And I think that's something that for as much as you try to progress your process, people tend to gravitate towards hey, can you email me this document or let's get on a call and can you be here so we can talk about that. And I think that in the future there's continued opportunity for us to collaborate and to do things from an electronic perspective.

So improving technological means for communication and getting people to adopt to it.

Yep.

Cool. Thanks for tuning in to M and A Science. I'm Kisan Patel and you just listened to Greg Delafranco with Deloitte. We hope this episode provided valuable insight into M and A transactions regarding key due diligence considerations, areas of risk and value drivers integration. If you have interesting M and A stories or suggestions to share, reach out to me. You can find my email in the show Notes. For more resources, including links or tools mentioned during the show, visit dealroom.net podcast join us next week when we uncover more secrets to successful MA transactions. This podcast was brought to you by DealGroening. DealRoom is a technology company that helps corporations on both the buy and sell side minimize risks and maximize value on MA transactions. We take the mess of data rooms, spreadsheets and emails and replace it with one easy to use process management tool. This results in big improvements in collaboration, security and risk tracking. Learn why Deal teams are switching a deal room@dealroom.net all views or opinions expressed by any individual in any form of communication on this podcast, written, oral or otherwise, are personal and do not represent the companies, firms, institutions, organizations or otherwise that they are associated with.